Section 4980H of the ACA implemented the Employer Shared Responsibility provision. This provision is also known as “Pay or Play”.

Under this provision Applicable Large Employers (ALEs) are required to offer affordable minimum essential coverage that meets minimum value to all full-time employees or pay a penalty in certain circumstances.

Definitions

Applicable Large Employer (ALE). An employer with 50 or more full-time or full-time equivalents in the preceding calendar year.

Offer of Coverage. Coverage must be offered to at least 95% of full-time employees and their children. Spouses are not included.

Affordable. Coverage must not exceed a certain percentage of the employee’s household income. In 2015 this percentage was 9.56%. In 2016 this percentage is 9.66%.

Minimum Essential Coverage (MEC). Qualifying health care coverage an individual must have to avoid the individual mandate. Most health plans meet this however excepted benefits under HIPAA do not.

Minimum Value (MV). Plan must coverage at least 60% of the total allowed costs that are expected to be incurred.

Full-Time Employee. Any employee that works 30 or more hours of service per week (or 130 hours per month). A look-back measurement method can be used to determine full-time status of employees.

Effective Date

This provision was effective for plan years beginning on or after January 1, 2015. However, the final regulations issued a 1 year delay for employers with less than 100 FTE’s until 2016 under certain conditions.

Calculating ALE Status

Most employers will know if they have 50 or more full-time employees but if an employer is unsure if they have 50 or more full-time employees, they can use the following calculation method.

For each calendar month of the preceding calendar year, employers must calculate FTE employees. This is done with the following formula:

____ Number of FT employees (those who average 30 hours a week for that month or at least 130 hours per month)

____ All hours worked by PT employees (but not more than 120 hours for any employee) for that month divided by 120

= ____ Number of FTE

Once all months have been calculated, add the monthly totals and divide by 12. If the average exceeds 50 FTEs, then the employer is an applicable large employer for the current calendar year.

However, there is an exception for Seasonal Employees. If the employer’s workforce exceeds 50 FT employees for 120 days or fewer during a calendar year, and the employees in excess of 50 who were employed during that period of no more than 120 days (four calendar months, for this purpose only), were Seasonal Employees, the employer would not be an applicable large employer.

An additional important factor to consider is that an employer’s size is measured on a controlled group basis as defined by Internal Revenue Code (IRC) §§414 (b), (c), (m), and (o). For the purpose of determining size, an employer must aggregate the total number of employees of all corporations that are under common control and are members of that employer’s particular controlled group. This includes, for example, employees of a controlled group of corporations, partnerships or proprietorships under common control, affiliated service groups or others to be prescribed by Treasury. Each employer under a controlled group that exceeds 50 would be considered an ALE member even if that individual employer is under 50.

The law and guidance from the Department of the Treasury indicates that employers will need to determine on an annual basis whether they are large employers.

Calculating Full-Time Employees

Under the ACA, a full-time employee is defined as an employee who works on average 30 hours per week or 130 hours per month. The regulations allows employers to use a look-back measurement period when determining full-time status.

Under the look-back measurement period, an employer can measure employees during a Standard Measurement Period, offer coverage during an Administrative Period and allow coverage to be effective for an entire Stability Period regardless of hours worked.

In order to fully understand this provision, it’s important to understand different terms:

Standard Measurement Period. A period of time of at least 3-12 consecutive months that the employer uses to count the number of hours worked by the employee. This period of time can be any period chosen by the employer provided that the determination is made on a uniform basis for all employees in the same category.

Initial Measurement Period. A period of time between 3-12 months where the employer determines the newly-hired variable hour employee is full-time. The employer must determine whether or not the employee worked an average of 30 hours a week during this period.

Stability Period. A period of time of equal to the duration of the Standard Measurement Period (but not less than 6 months) in which the employee is considered to be full-time.

If during the Standard Measurement Period an employee is determined to be full-time (e.g. works an average of 30 hours per week) then the employee is considered a full-time employee for the ENTIRE Stability Period regardless of the number of hours worked during the Stability Period as long as he or she remains an employee.

Administrative Period. An optional period of time between the Standard Measurement Period and the Stability Period for employers to determine which On-going Employees are eligible for coverage during the next Stability Period, answer questions from employees, and enroll employees for the next Stability Period.

The Administrative Period following the Standard Measurement Period can last up to 90 days but does not have to, there’s no requirement.

This period should overlap the previous Stability Period to avoid creating any gap in coverage and should match up with the plan’s open enrollment period.

Monthly Measurement Period. Under the Monthly Measurement Method, an employee’s Hours of Service are totaled at the end of each calendar month to determine the employee’s full-time status for that month.

Hours of Service. Generally, an hour of service includes any periods for which the employee is paid or entitled to payment for services performed as well as certain periods during which the employee is paid or entitled to payment even though the employee is not performing services.

On-going Employee. An employee who has been employed for one entire Standard Measurement Period and following Administrative Period.

New Employee. An employee who has been employed for less than one complete Standard Measurement Period.

There are four types of New Employees: Non-Variable, Variable, Part-time and Seasonal Employees. The Look Back Measurement Period Method is applied differently to Variable/Part-time/Seasonal Employees than it is to Non-Variable Employees.

Non-Variable Employee. An employee who is expected to work at least full-time on their start date. The Initial Measurement Period would not apply.

Variable Employee. Employees who, as of their start date, the ALE cannot make a determination that the employee is reasonably expected to average at least 30 Hours of Service per week because the employee’s hours will vary or are uncertain.

Seasonal Employee. An employee qualifies as a Seasonal Employee if the following requirements are satisfied: (i) the employee is hired into a position for which the customary employment is 6 months or less (although it can be longer under unusual circumstances) and (ii) the period of employment customarily begins during the same date each calendar year.

Employees that qualify as Seasonal Employees are treated as Variable Employees for purpose of the look back Measurement Period, even if the ALE

Member can make a determination on the hire date that the employee is reasonably expected to average 30 Hours of Service or more per week for each month employed during the Initial Measurement Period.

Part-Time Employees. A Part-Time Employee is an employee for whom the ALE Member can make a determination on the start date that the employee is not reasonably expected to average 30 Hours of Service for each month employed during the Standard Measurement Period. During an Initial Measurement Period, Part-Time Employees are subject to the same rules as Variable Employees.


The Look Back Measurement Period Method generally operates according to the following, fundamental principles:

Note: ALE Members who adopt the Look Back Measurement Period Method must establish procedures for New Employees and procedures for Ongoing Employees.

  1. ALE Members will establish an Initial Measurement Period for New Employees during which the Hours of Service of a new Variable Hour, Seasonal Employee, or Part-Time Employee are measured over that Initial Measurement Period. Non-Variable Employees will be subject to the Monthly Measurement Period Method until the Stability Period following the Standard Measurement Period
  2. The employer will also establish a Standard Measurement Period for Ongoing Employees during which each Ongoing Employee’s aggregate Hours of Service are collected.
  3. During an Administrative Period that follows the applicable Measurement Period, the ALE Member will identify the employees that averaged 130 Hours of Service or more per month during the applicable Measurement Period.
  4. Each employee who averaged 130 Hours of Service or more per month during the applicable Measurement Period will be a Full-time Employee during each month of the following Stability Period.
  5. The manner in which the Look Back Measurement Period Method is applied differs slightly depending on whether the employee is a New Employee or an Ongoing Employee.

Note. All employees in a distinguishable class to which the ALE Member applies the Look Back Measurement Period are subject to a Standard Measurement Period. The Variable and Non-Variable distinction applicable to New Employees does NOT apply to Ongoing Employees.

IMPORTANT: This is a very general overview of the determination of full-time employees. There has been a lot of guidance released regarding the determination of full-time status and how it relates to Seasonal Employees, variable hour employees and employees transitioning from variable to On-going Employees.  If you would like more detail about this topic, please contact RCI. 

Penalties

There are 2 penalties that can be assessed under the Employer Shared Responsibility mandate. The first falls under Section 4980H(a) and the second falls under Section 4980H(b).

Section 4980H(a). This penalty is triggered if an employer failed to offer minimum essential coverage to a full-time employee (and their children) and that employee enrolls in the Marketplace and qualifies for a subsidy.

Penalties will be indexed each year. The penalties are/were as follows:

  • 2014 - $2,000 annually ($166.67/month)
  • 2015 - $2,080 annually ($173.33/month)
  • 2016 - $2,160 annually ($180/month)

Penalties are determined on a monthly basis and will take into account the entire Full-Time employee population (minus the applicable waiver.)

In 2016 employers are allowed to minus the first 30 Full-Time Employees when calculating the penalty.

For example: You have 150 Full-Time employees and you fail to offer coverage to John Smith. John Smith obtains coverage under the Marketplace and qualifies for a subsidy. He claims that you never offered him coverage. The penalty would be assessed on 120 (150-30) employees for every month you failed to offer coverage to John and for which he received a subsidy under the Marketplace.

Section 4980H(b). This penalty is triggered if the minimum essential coverage that was offered was not affordable or did not provide minimum value and an employee enrolls in the Marketplace and qualifies for a subsidy.

Penalties will be indexed each year. The penalties are/were as follows:

  • 2014 - $3,000 annually ($250/month)
  • 2015 - $3,120 annually ($260/month)
  • 2016 - $3,240 annually ($270/month)

Penalties are determined on a monthly basis and will only take into account the employee receiving the subsidy.

For example: You have 150 Full-Time employees and you offer coverage to John Smith but the coverage you offered is not affordable to him. John Smith obtains coverage under the Marketplace and qualifies for a subsidy. He claims that the coverage you offered was too expensive. The penalty would be assessed on only John for every month you failed to offer affordable coverage and for which he received a subsidy under the Marketplace.

Offer of Coverage

In order to avoid a penalty, an employer must offer affordable minimum essential coverage to substantially all of its full-time employees and their dependent children. Spouses are not required to be offered coverage.

In 2016 substantially all means 95% of the Full-Time Employee population.

Note: Employees are not required to take coverage; however, they must be offered coverage.

Affordability

In order to avoid a penalty, the employee’s share of the self-only premium for the employer’s lowest-cost plan that provides minimum value cannot exceeds a specific threshold of the employee’s household income.

The threshold is indexed each year:

  • 2014 – 9.50%
  • 2015 – 9.56%
  • 2016 – 9.66%

The Department of Treasury has reiterated in guidance that although an employer must offer coverage to employees and their dependent children, the affordability test is based on an employee’s contribution to self-only coverage.

Further, in recognizing that employers do not have access to information about employees’ household incomes, and are prohibited from accessing taxpayer return information, the Departments have created 3 safe harbors.

Coverage is unaffordable if self-only coverage exceeds either8:

  • 9.5% of the employee’s W-2 wages for the year
  • 9.5% of the employee’s monthly wages determined by multiplying the employee’s hourly rate by 130 hours per month (this is for hourly employees – for salary employees the monthly wages would use instead of this calculation)
  • 9.5% of the federal poverty level for a single individual

*Currently the amounts used for these safe harbors will stay at 9.5% even if the threshold increases each year as previously stated.

Note: For purposes of a premium tax credit (i.e. subsidy), the IRS is going to look at the employee’s modified adjusted gross income (MAGI) off the latest filed Form 1040. This means that the IRS is always looking in the past 1 year. An employer can calculate premiums to be affordable but when viewed by the IRS they can be deemed unaffordable based on MAGI and looking at past data.

Minimum Value Test

In order to avoid a penalty a plan’s share of the total allowed costs of benefits provided under a plan must equal or exceed 60% of such costs.

The Departments expect that most large employers’ health care plans already meet or exceed this 60% threshold, but it will be important for employers to review the regulations on minimum value standards and how they must certify compliance. IRS Notice 2012-31 outlines the following 3 approaches that can be used to determine whether an employer-sponsored plan provides minimum value:

1.  Minimum Value (MV) Calculator

The MV calculator allows an employer to input in-network cost-sharing features (i.e., deductibles, co-payments, coinsurance, out-of-pocket limits) of their health plan for different categories of benefits into an online calculator. Employers would not be able to use the MV calculator if they have “non-standard” features on any of the four core categories of benefits, such as atypical quantitative or cost-sharing limits.

This calculator is available at https://www.cms.gov/cciio/resources/regulations-and-guidance/index.html#Plan Management

2.  Safe-harbor checklist

The checklist allows an employer to perform an “eyeball test” and see if their plan design features meet one of several design-based safe harbors, such as a high-deductible health plan with an employer-provided HSA. In order to utilize this option, an employer would be required to cover all four core categories of benefits and services and could not have nonstandard features. Each safe harbor checklist would describe the cost-sharing attributes of a plan that apply to the four core categories

3.  Actuarial certification

The certification option allows an employer that sponsors a plan with nonstandard features to use a certified actuary to determine whether a plan meets minimum value. Plans with nonstandard features, such as atypical quantitative limits on the four core benefits, will need to use this method for determining MV